Teething problems for HMRC’s simplification of self-assessment

After some delay, HMRC has now issued Simple Assessments to many taxpayers relating to underpaid tax for 2023/24. Simple Assessment is a method used by HMRC to collect income tax from individuals who do not file a tax return. Normally issued between July and November following the end of the tax year, that this process could take until the end of March 2025 due to the sheer volume of information HMRC received. In addition, that it is unable to match around 20% of bank accounts to taxpayer records, meaning a significant proportion of tax assessments issued may not be completely accurate. 

HMRC’s goal to simplify the system for taxpayers by utilising the data available to them is a commendable one, but it is important that taxpayers’ trust in the process is not lost early on. At the moment, it is difficult to reconcile a position where taxpayers are being removed from self-assessment at the same time as HMRC confirming a completely accurate alternative does not exist. HMRC recently launched a seeking views on opportunities for improving the quality of data acquired under HMRC’s bulk data gathering powers. The government recognises that HMRC receives a huge amount of data but it is often provided late or of poor quality, which means it cannot utilise this data in the same way as other tax authorities, such as pre-populating tax returns.  

The pace of change is set to quicken and HMRC has plans to launch further digital services this year predicated on data sharing. This month HMRC will launch a new PAYE portal enabling taxpayers to check the data HMRC holds on its employments and pensions and notify changes. In the summer, HMRC intends to launch a new digital service enabling certain taxpayers liable to the high income child benefit charge to report and pay the charge. At a later stage in this parliament, self-assessment thresholds for trading income will be increased to remove even more taxpayers from the requirement to file a tax return. Those needing to pay tax will do so through a new online service, which has not yet been built. 

HMRC will undoubtedly hope that all these efforts will help to close the tax gap, the theoretical difference between the tax HMRC considers should be paid and what is actually paid. By modernising IT and data systems, HMRC expects to help taxpayers get their tax right and thereby improve tax collection. Boosted by the success of making tax digital (MTD) for VAT, HMRC is ploughing ahead with MTD for income tax self-assessment (MTDITSA), which some consider to be the greatest change to the tax system in a generation. There are however a number of practical concerns and questions yet to be addressed by HMRC before the system becomes mandatory for some taxpayers in April 2026. 

MTDITSA has a promising estimated additional income tax yield of £900m, with a further £125m from the new MTD late payment penalty regime, by 2029/30. This overshadows the £185m to £195m additional revenue raised in 2019/20, in line with estimates, from MTD for VAT. Notably, HMRC recently received £16m funding to modernise HMRC’s app to allow self-assessment taxpayers to make voluntary advance payments. A potential next step is that ultimately HMRC may also look to bring forward the tax payment deadlines in future to collect more tax and sooner, particularly given that debt collection is clearly a government priority following the Spring Statement announcements. 

Tax simplifications and a digital, data-driven tax system are welcome. It is clear however that more investment is needed to achieve HMRC’s digital ambitions and deliver a modernised tax system within a realistic timeframe that does not leave taxpayers and their advisors frustrated, disillusioned or confused. Whether this delivers the additional tax yield HMRC hopes for remains to be seen. 

HMRC is expected to publish a transformation roadmap after the spending review later this year setting out detailed plans to meet their three strategic priorities across improving customer service, closing the tax gap and modernising the tax system. In the meantime, HMRC has made it clear that it remains the taxpayer’s responsibility to ensure the data HMRC holds is correct and to pay the correct amount of tax, which sounds like not a lot has changed.